For the last six years "Fashion Today" magazine has conducted research in how to have their color-display adverstisements printed in brighter, bolder colors. Recently the chemist in Fashion's laboratory developed an economical process for using a certain type of ink with a new, safer solvent. The ink, which is of exceptional quality has been used only infrequently in the past because of the dangerous nature of the solvents which, until this recent discovery, were required for its use. Thus, the higher quality ink could now be used for printing high quality magazine ads in a safer and more economical process.
Accordingly, Fashion Today entered into a written
contract with the Metropolitan Print Company to print 30,000 copies
of the advertisements for its forthcoming issue. The contract also
requires Metropolitan to print 30,000 copies of the textual pages of
the next issue. The magazine will consist of 120 pages of
advertisements and 80 pages of text. The price for this work was to
be $100,000, payable upon delivery of the pages to Fashion. The terms
of the contract required Metropolitan to use the new process for the
special high-quality ink in preparing the advertisement pages, but
permitted use of normal ink in preparing the pages containing
text.
Metropolitan was anxious to be the first Printshop to use this new
process because it would then be in a position to capture much of the
new market that would develop for advertisements printed with the
high quality ink now that it could be used in a safe and economical
manner.
In order to be able to properly perform its
obligations under the contract Metropolitan acquired $50,000 worth of
special equipment for the new process. In addition, the President of
Metropolitan called the assistant manager of Acme Ink Co. and
arranged, during a phone conversation, to have 5,000 gallons of the
ink, with the new solvent, manufactured to specifications and
delivered to Metropolitan within 10 days for a price of $5,000.
Acme's assistant manager was a recently graduated MBA student with no
background in the ink business and thus he did not know about the
safety problems that had been encountered with this ink in the past.
Their understanding was that Metropolitan would pay $2,000 in advance
and the balance within 30 days of Acme's delivery of the ink, subject
to the understanding that Metropolitan would not have to pay the
remainder of the purchase price if the ink was not manufactured
properly. The next day, Metropolitan's president sent Acme's manager
a letter, confirming the order, and including the $2,000 downpayment.
The letter, however mistakenly provided for only 3,000 gallons of the
ink at the $5,000 price. The market value of the ink contracted for
was $1 per gallon.
The letter sent by Metropolitan, which contained specifications for the solvent to be used with the ink was inadvertently ignored. When Ms. Acme, the owner of Acme Ink Co. was told about the agreement with Metropolitan, she became quite concerned about Acme's potential personal injury liability from the sale of the special ink, mistakenly thinking that it was to be produced with the older, more dangerous solvent. Thus, she decided to substitute a different ink that appeared the same as the ink that was supposed to have been manufactured for Metropolitan, but which would not produce the more attractive bolder, brighter color that Fashion sought. The ink substituted by Acme had a fair market value at all times relevant of $4 per 5 gallon quantity. In due course, 5,000 gallons of the inferior substitute ink was delivered to Metropolitan.
Metropolitan did not notice the substitution and used the inferior ink to produce the advertisement pages. The substituted ink appeared to work fine with the process developed by Fashion for use by Metropolitan in preparing Fashion's advertisements. The substitution was first noticed only when the advertisement pages were delivered to Fashion and examined by Fashion's chemist. The pages were of a quality suitable for publication, and were, indeed, of better quality that that which Fashion had been accustomed to using, but they did not display the brighter, bolder colors that would have been produced had they been prepared with the special ink using the new printing process.
As a result Fashion has refused to pay for the
advertisement pages and Metropolitan, whose president has called you
for assistance, is threatening not to print the pages of text for
Fashion Today's next issue. Further, Metropolitan has not yet paid
for the ink delivered by Acme and actually used to print the
advertisement pages.
DRAFT A MEMO ANALYZING THE RIGHTS AND LIABILITIES
OF METROPOLITAN:
Other facts which may be helpful to you include: Fashion would have to incur an additional $300,000 in expenses (for paper, salaries, and other overhead) in order to produce the issue. Fashion Today magazine usually sold for $3.00 per copy and normally all of the 30,000 copies were sold. Advertising revenues from the magazine usually amounted to $500,000 per issue, but the Business Manager of Fashion Today predicted that the new brighter bolder colors which were to be used would increase advertising revenues by $100,000 per issue.